You have probably never heard of Kashagan (unless you have read my recent diary on
Caspian Oil, of course!), but a significant event took place this week with regards to that field, which is the biggest discovery (in 2001) in the past 30 years and probably one of the 5 largest fields ever found:
BG, the British energy group, has finally completed the sale of its 16.7% stake in the project to 5 of the 6 other shareholders (ExxonMobil, Shell, Total, ENI, ConocoPhillips - with Inpex of Japan not participating in the transaction).
This is interesting because BG had actually sold that stake to Chinese oil companies CNOOC and Sinopec two years ago.
So what happened in the meantime?
Well, what happened is that the other shareholders
exercised their pre-emption rights under the production-sharing agreement (PSA), the agreement regulating the rights and obligations of the investors and the host government. The other shareholders have a right to match the price offered by an outside buyer and take the stake instead (and it is shared between those that do exert that right, in that case the 5 above-mentioned companies).
Now, with Kashagan the biggest oil field discovered in the past 30 years, and situated in a country which is a neighbor of China, the Chinese were keenly interested to get access to the table. So they were furious with the "pre-empters" and started to threaten them of retorsions elsewhere in the world. The pressure was especially intense on Shell, then involved in a big pipeline deal and a major petrochemical investment in China, with China threatening to kick Shell out of the project.
But Shell and the other Western majors held firm and the pre-emption agreement was signed between them and BG later in 2003.
The Kazakh government then stepped in the dispute, as their approval was required under the SPA. Not being a shareholder of Kashagan, and thus not directly involved in operational decisions (although, as the host country under the PSA, they of course get a - significant - share of the revenues, they have to approve all investment decisions and industrial activity and they enforce environmental, labor or other standards), they decided that they also wanted a seat at the table, and claimed that they had a right of pre-emption of their own.
At the same time, it appeared that the technical difficulties on the field were a lot worse than expected (fluctuating sea levels with strong currents; deep wells; unstable salt sections; high pressure; high levels of hydrogen sulfide; and potential high loss circulation) and would delay the date of first production from 2005 to 2008.
Oil Online
Tapping this field, as Eni acknowledges, represents 'one of the greatest challenges the petroleum industry has been lately faced with, both in terms of extremely severe climatic conditions and in respect of the sensitive environmental balance'. Winters in the north Caspian are extremely harsh, with temperatures dipping down to -40°C and water depths at location are extremely shallow, only 13-20ft (4-6m) deep. The Kashagan reservoirs make life no easier with their pressures of up to 790bar and 18% H2S content.
(...)
Kashagan is so big, so vast, so complex a development that I can think of no field that compares in any way in the world today,' underlines Aker Kvaerner Engineering Technology's VP business development for the FSU, Kjartan Dale. 'It is in a very harsh environment but one that is extremely sensitive for many reasons. And the reservoir is under huge pressure with high hydrogen sulphide content.
'Nor is there a great deal of infrastructure,' he notes. 'There is nothing that we could call an offshore yard in Kazakhstan.
Halliburton page (sorry, but they are one of the main contractors)
The Caspian Sea's extreme climate, sea life and well conditions present numerous logistical, environmental and safety challenges. The Kashagan field lies offshore in waters ranging from two to 10 meters deep, with strong currents and bounding waves. Temperatures can rise to 40°C in summer and fall below -30°C in winter, forming a coat of shifting ice from November through April.
The area is home to a rare species of seal and is the breeding ground of the beluga sturgeon, producer of top-quality caviar. In addition, Kashagan's deep, high-pressure wells contain high levels of hydrogen sulfide (over 30%).
The delay these challenges cause made it possible for the Kazakhs to claim that the PSA was not being fulfilled as agreed and to claim new conditions. This lead the negotiations to stall for a long time, and even as late as February of this year, the Kazakhs were claiming that they would buy half of the stake sold by BG; in the meantime, they have been busily pushing the Chinese to build a pipeline within Kazakhstan from the (Western) oil fields to the Chinese border.
That pipeline is likely to happen, but the Chinese will have little say on where the oil from Kashagan goes, as the Westenr majors held firm and finally kept the full ownership of the project this week. As I wrote last week (see my diary linked to above), Kashagan oil is likely to use the BTC and CPC pipelines; both go West to the Mediterranean and the Black Sea respectively, i.e. to Europe.
So chalk this partly under-the-radar fight as a significant victory for the West against China in the fight for the oil flows.
Note also that this field exemplifies the difficulties of oil production by the Western majors today:
- difficult fields, requiring expensive technology;
- harsh conditions, requiring expensive infrastructure;
- sensitive environmental conditions, requiring expensive protection plans
- prickly host governments, causing (expensive) delays and renegotiations.
And that's the best field available, because at least its size makes the investments worthwhile... the rest is even worse.